Fixed Assets Flashcards
Cole Co. began constructing a building for its own use in January year 4. During year 4, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during year 4 was $40,000. What amount of interest cost should Cole capitalize? 40,000 50,000 70,000 20,000
The amount of interest cost which should be capitalized during building construction is the LOWER of AVOIDABLE INTEREST or ACTUAL INTEREST. Avoidable interest equals the interest computed on the weighted-average amount of accumulated expenditures on the building ($40,000). Since actual interest is $70,000 (50,000+20,000), the amount capitalized should be $40,000
On July 1, year 4, Balt Co. exchanged a truck for twenty-five shares of Ace Corp. 's common stock. On that date, the truck's carrying amount was $2,500, and its fair value was $3,000. Also, the book value of Ace's stock was $60 per share. On December 31, year 4, Ace had 250 shares of common stock outstanding and its book value per share was $50. What amount should Balt report in its December 31, year 4 balance sheet as investment in Ace? 2,500 3,000 1,500 1,250
When the investment was acquired, it was recorded at cost - the fair market value of the asset surrendered to acquire it. The July 1 entry was:
Investment in Ace stock 3,000
Truck 2,500
Gain on disposal 500 ($3,000 - $2,500)
The investment would be reported in the 12/31/y4 balance sheet at $3,000. The book value of Ace’s stock does not affect the amount recorded on Balt’s books
A non-monetary exchange is recognized at fair value of the assets exchanged unless?
the fair value is not determinable, the exchange transaction is to facilitate sales to customers, or the exchange transaction lacks commercial substance.
When determining the commercial substance of the exchange, which of the following items is NOT considered?
cash flow of new asset
cash flow of exchanged asset
cash flow from potential sale of new equipment at a later date
cash flow from tax effects on the exchange to avoid taxes
In determining cash flow from a transaction, the effect of taxes is not considered unless it serves a legitimate business purpose other than tax avoidance. In assessing the commercial substance of an exchange, tax cash flows arising solely to avoid taxes are not considered.
On March 31, year 4, Winn Company traded in an old machine having a carrying amount of $16,800, and paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The cash flows from the new machine are expected to be significantly different than the cash flows from the old machine. On March 31, year 4, what amount of loss should Winn recognize on this exchange? 2,300 0 3,700 6,000
The cash price of the new machine represents its fair market value (FMV). The FMV of the old machine can be determined by subtracting the cash portion of the purchase price ($6,000) from the total cost of the new machine: 20,500 - 6,000 = 14,500. Since the book value of the machine (16,800) exceeds its FMV on the date of the trade-in (14,500) the difference of 2,300 must be recognized as a loss.
Vik Auto and King Clotheir exchanged goods, held for resale, with equal fair values. Each will use the other’s goods to promote their own products. The retail price of the car that Vik gave up is less than the retail price of the clothes received. Assuming the transaction has commercial substance, what profit should Vik recognize for nonmonetary exchange?
A profit is not recognized
A profit equal to difference between retail price and cost of car
A profit equal to difference between retail prices of clothes received and car
A profit equal to difference between fair value and cost of car
d
Yola and Zaro Co., are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro echanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $20,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:
Yola Co. Zaro Co.
Cost $100,000 $126,000
Market values 130,000 150,000
In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?
3,200
20,000
24,000
0
This transaction qualifies as an exception to fair value measurement and should be measured at book value. However, when these assets are exchanged, and boot is received and a gain results, the exchange is treated as part sale and part exchange. The earnings process is assumed to be complete for the portion relating to the boot received. The gain recognized is computed as follows:
Boot received/(boot received +FMV of assets received) * total gain = gain recognized.
Total gain = (130,000 + 20,000) - 126,000 = 24,000
assets received by Zaro book value of asset given up
In this case, it would be calculated as follows:
20,000/(20,000+130,000) * 24,000 = 3,200
An entity disposes of a nonmonetary asset in a nonreciprocal transfer. A gain or loss should be recognized on the disposition of the asset when the fair value of the asset transferred is determinable and the non-reciprocal transfer is to :
another entity a stockholder of the entity
no yes
yes no
no no
yes yes
a transfer of a non-monetary asset in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, with a gain or loss recognized on the disposition, whether the transfer is made to a stockholder or to another entity
On July 1, year 4, one of Rudd Co. 's delivery vans was destroyed in an accident. On that date, the van's carrying value was $2,500. On July 15, year 4, Rudd received and recorded a $700 invoice for a new engine installed in the van in May year 4, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van. What amount should Rudd report as gain (loss) on disposal of the van in its year 4 income statement? 0 300 1,000 (200)
A gain (loss) must be recognized when a nonmonetary asset is involuntarily converted into monetary assets even if the company reinvests the monetary assets in replacement nonmonetary assets. The gain or loss is the difference between the insurance proceeds received ($3,500) and the carrying value ($2,500) must be adjusted for the capital expenditure ($700) which has not yet been recorded. When a major component of an asset like an engine is replaced, the preferred treatment is to take the old component off the books and record the new component. 3,500 - 3,200 = 300 gain. The $500 invoice should be recorded as repairs expense, and therefore does not affect the van’s carrying value.
During year 4, King Company made the following expenditures relating to its plant building:
Continuing and frequent repairs $40,000
Repainted the plant building 10,000
Major improvement to the electrical wiring 32,000
system
Partial replacement of roof tiles 14,000
How much should be charged to repair and maintenance expense in year 4?
82,000
96,000
64,000
54,000
Generally, a cost should be capitalized if it improves the asset and expensed if it merely maintains the asset at its current level. The work on the electrical wiring system (32,000) is capitalized instead of expensed since it is a major improvement. total expense = 64,000
Turtle Co. purchased equipment on January 2, year 2, for $50,000. The equipment had an estimated five-year service life. Turtle's policy for five-year assets is to use the 200% double-declining depreciation method for the first two years of the asset's life, and then switch to the straight-line depreciation method. In its December 31, year 4 balance sheet, what amount should Turtle report as accumulated depreciation for equipment? 38,000 39,200 42,000 30,000
The DBB rate is two times the straight-line rate 1/5 * 2 = 2/5 or 40%. Therefore, depreciation for the first 2 years is
Year 1 : 50,000 * 40% = 20,000
Year 3: (50,000 - 20,000) * 40% = 12,000
In year 4, Turtle switch to straight-line. The book value (50,000 - 32,000 = 18,000) would be depreciated
Year 4 depreciation is 18,000 * 1/3
Rago Company takes a full year’s depreciation expense in the year of an asset’s acquisition, and no depreciation expense in the year of disposition. Data relating to one of Rago’s depreciable assets at December 31, year 5, are as follows:
Acquisition year Year 2
Cost $110,000
Residual value 20,000
Accumulated depreciation 72,000
Estimated useful life 5 years
Using the same depreciation method as used in year 2, year 3, and year 4, how much depreciation expense should Rago record in year 5 for this asset?
22,000
18,000
12,000
24,000
After 3 years (year 2-year 4) accumulated depreciation is $72,000. Therefore, the method that was used was the sum-of-the-years’ digits method. Using this method, after three years the balance in accumulated depreciation would be 12/15 of the depreciable base (5/15 + 4/15 + 3/15) . The depreciable base is the cost ($110,000) less the residual value ($20,000) or $90,000. accumulated depreciation at 12/31/y4 would be $72,000. Year 5 depreciation expense, using the SYD method is $12,000 (90,000 * 2/15)
A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
Straight-line Productive output
No Yes
Yes Yes
Yes No
No No
The formula to determine depreciation using the productive output method is:
[current activity(output)/total expected activity] * original cost less salvage value
Note that both of these methods use cost minus salvage value as the depreciable base of the asset. This means that after all depreciation has been recorded using either method, the net asset will be recorded at salvage value, and accumulated depreciation will equal the original cost minus salvage value.
Comparison among three different depreciation methods: straight-line, sum of the years digits, and double declining balance
Straight-line : depreciation expense that stays constant over time.
Sum-of-the-years’ digits : depreciation expense that decreases at a constant rate (linear function)
Double-declining balance: depreciation expense that decreases at a decreasing rate (nonlinear function)
which of the following uses the straight-line depreciation method?
group depreciation or composite depreciation
Composite (group) depreciation averages the service life of a number of property units and depreciates the group as if it were a single unit. The term “group” is used when the assets are similar; the term “composite” is used when they are dissimilar. The mechanical application of both of these methods is identical.
During year 4, the management of West Inc. decided to dispose of some of its older equipment and machinery. By year-end, December 31, year 4, these assets had not been sold, although the company was negotiating their sale to another company. On the December 31, year 4 balance sheet of West Inc., this equipment and machinery should be reported at:
Carrying amount
Fair value
The lower of carrying amount or fair value
The lower of carrying amount or fair value less cost to sell
When management plans to dispose of long-lived assets and limited-lived intangibles, the assets shall be reported at the lower of carrying amount or fair value less cost to sell
At December 31, year 4, Matson Inc. was holding long-lived assets that it intended to sell. The assets do not constitute a separate component of the company. The company appropriately recognized a loss in year 4 related to these assets. On Matson’s income statement for the year ended December 31, year 4, this loss should be reported as a(n)
Component of income from continuing operations before income taxes.
Separate component of selling or general and administrative expenses, disclosed net of tax benefit.
Component of the gain (loss) from sale of discontinued operations, disclosed net of income taxes
Extraordinary item
Losses associated with long-lived assets which are to de disposed of are to be reported as a component of income from continuing operations before income taxes for entities preparing income statements. Discontinued operations result from disposal of a separate business component.
Taft Inc. recognized a loss in year 3 related to long-lived assets that it intended to sell. These assets were not sold during year 4, and the company estimated, at December 31, year 4, that the loss recognized in year 3 had been more than recovered. On the December 31, year 4 balance sheet, Taft should report these long-lived assets at their:
Fair value on December 31, year 4.
Fair value on December 31, year 3.
Carrying amount on December 31, year 3.
Fair value less cost to sell on December 31, year 3.
In year 3, Taft recognized a loss on the long-lived assets that were to be sold and changed the carrying amount of these assets to fair value less cost to sell. In year 4, the assets have still not been sold. The loss recognized has been more than recovered. Subsequent revisions in estimates of fair value less cost to sell shall be reported as adjustments of the carrying amount of an asset to be disposed of. However, the carrying amount may not be increased above the carrying amount prior to impairment. The same amount recognized as a loss in year 3 would be recognized as a recovery (gain) in year 4 income statement.
